If you have suffered a sudden financial crisis and have been unable to repay your loans, you can seek the Reserve Bank of India’s loan restructuring option to lower your repayment burden. This may come as a boon for borrowers who have faced a disruption in their finances or those who may have suffered some major health problems and therefore unable to repay their dues.
However, the question is: How does debt restructuring affect your credit rating? Read on to understand all about loan restructuring effect on CIBIL score. But before that, it helps to understand what is the eligibility for loan restructuring and what does it entail?
The RBI has come up with a Loan Resolution Framework 2.0 for borrowers who have suffered financial difficulties and are unable to repay dues.
The 2.0 framework is for those who have not availed restructuring under the previous facilities such as the Resolution Framework 1.0, which was dated August 2020.
However, if individual borrowers who had sought relief under the resolution framework of 2020 and had a moratorium that was lower than two years, they may opt for relief under the new framework and seek an extension for two years.
The RBI states that standard loan accounts are eligible for restructuring if they have been tagged ‘Standard’ as of March 2021.
All kinds of retail loans, including home loans, personal loans and car loans, are eligible for restructuring.
The banks that are eligible for loan restructuring include all-India financial institutions, non-banking financial companies (NBFCs), commercial banks, local area and regional rural banks, primary co-operative banks, state and district central co-operative banks, apart from small finance banks.
A credit rating is a score that measures a borrower’s ability to repay a loan on the basis of their past repayment track record and their income. Typically, credit scores are offered by bureaus like Credit Information Bureau Limited (CIBIL). The score is a three-digit one, ranging from 300 to 900, with 300 being the poorest. Banks and other lenders may assess a borrower’s credit score before processing a loan application, so credit scores have a key role to play when it comes to loans.
Although restructuring is a relief for borrowers, does restructuring affect credit rating? The answer in short is yes. A restructured loan in CIBIL report is reflected as such (‘restructured’) and this may impact your future chances of borrowing a fresh loan or opting for a credit card.
The RBI’s loan restructuring plan helps borrowers repay according to their changed repayment capability, which would mean a rescheduling of the EMI repayment, lowering of interest rates, converting interest into a fresh loan or by granting moratorium. The RBI’s loan restructuring option comes after the Central government’s first moratorium scheme ended in August 2020.
As a borrower:
Your loan repayment tenure may be rescheduled.
A two-year moratorium on your loan on the basis of your income may be considered.
Also, any interest that has been accrued or charged may be converted into another loan or credit option.
Also, as a borrower, you may need to ensure you have certain documents in place. They include:
Proof of income, include income statements or salary slips
Know-Your-Customer (KYC) documents such as your ID proof (Aadhar card), PAN card and driving licence
GST returns for self-employed/businesses, MSME registration certificates and IT returns.
Also unlike the EMI moratorium scheme that was announced for the March to August 2020 period, the RBI has offered discretion to banks and financial institutions under the Framework 2.0. Accordingly, banks have the discretion to decide the amount of moratorium and whether the same is on interest or the principal or on both. The banks also have the discretion to change repayment schedules of the principal and hike interest for restructured loans. They may also charge a processing fee.
Consider costs: When you opt for restructuring of your loan, it is important to keep in mind that while it does offer relief over the short-term, it also adds up to your costs. In case the bank hikes interest rates, the overall cost of your loan also rises proportionately. Also, in case of a moratorium, the interest that is not paid adds up and pushes up the outstanding amount of principal.
Keep other options in mind: It also helps to assess your financial situation before opting for loan restructuring. If you have no other options and your cash flows have been severely impaired, opting for a loan restructuring is the best available choice for you. The restructured loan in CIBIl credit report reflects as it is but it may be better to be in such a scenario than to be in a situation where you may not be able to pay your EMIs. However, if you are able to find other income sources or manage your expenses effectively to ensure repayment of EMIs, it may not be advisable to opt for restructuring.
Restructuring is not automatic: Also remember that your loan doesn’t automatically get restructured if you don't pay your EMIs. You may need to apply for the restructuring and seek advice from the bank on how to go about the same.
Track your CIBIL score: Take a look at your CIBIL report and explore ways to boost your credit score in the future. Though you know all about the loan restructuring effect on CIBIl, your score may pick up once you start repaying your EMIs in a timely manner after the moratorium. You may also take steps to check making too many loan requests in the future.
Loan restructuring is an option when a borrower is unable to repay EMIs because of a financial problem. Restructured loan in CIBIL report is reflected as such and may impact the credit score and affect a person’s ability to borrow in the future. However, when income flow is severely impacted and an individual has exhausted other options of repayment of EMIs, restructured loans may come as a relief. It is important to remember that such loans come with a cost.